As bankruptcies surge, Congress ponders change in law

WASHINGTON — In 2005, Congress passed a new law aimed at making it harder for people to file for bankruptcy and walk away from their debts.

With the tougher requirements, the number of bankruptcies declined in 2006 but surged by nearly 40 percent in 2007, according to statistics released Thursday. And experts predict the numbers will go higher this year.

The issue is gaining plenty of attention on Capitol Hill, where leading Democrats are proposing to roll back the landmark bankruptcy law. As the number of foreclosures rise, backers of an overhaul say it's needed to prevent more Americans from losing their homes.

"You ought to never lose your home in a bankruptcy proceeding," Connecticut Democratic Sen. Chris Dodd said during a presidential debate in Iowa last month.

Democrats want to help constituents such as Nettie McGee, who bought an $80,000 house — her first — in Chicago in 1999, when she was 65 years old.

Living on Social Security, McGee said she had to refinance her home to pay $5,000 in back taxes to avoid a foreclosure. She said she wasn't aware that her house payment would rise from $706 to $912 per month, beyond what she could afford on her fixed income.

"I thought I signed a fixed-rate mortgage," she told the Senate Judiciary Committee during a hearing last month. "I had no idea my payments would jump almost 25 percent. My interest rate went from 7.87 percent to 10.87 percent, and it could eventually go as high as 13.87 percent. I don't know how I'll make my payments now. They are higher than my Social Security check."

She had a message for Congress: "Please help people like me, people who waited their entire lives to own a home. Please, help us keep our homes."

Rep. Emanuel Cleaver, D-Mo., said that many homeowners facing foreclosure "were swindled by modern-day snake-oil salesmen dressed as bankers." He said Congress must do what it can to ensure that victims get fair hearings in bankruptcy court.

"The subprime crisis is real and no longer just affecting bankers — it is coming to our streets," Cleaver said. "We can see the faces of those struggling to make payments or losing their homes, and it is heartbreaking."

President Bush entered the debate last month, when he suggested a five-year freeze on loan rates as a way to slow the pace of home foreclosures. But some members of Congress are leery of any more government intervention.

"I do know that we are not going to change the law of supply and demand," said Sen. Jeff Sessions, R-Ala. "And if we make too many rules, particularly on the back end in court, we are liable to reduce the amount of money available to the average person."

While Dodd's White House hopes ended after the Iowa caucuses on Thursday night, his voice still carries plenty of clout on Capitol Hill. As chairman of the Senate Banking Committee, he has ignited a feud with the financial services industry by proposing to give bankruptcy judges more leeway in how they treat home mortgages. And Dodd has lined up support from more than a dozen senators for a bill that would tighten predatory lending practices, which are blamed for driving thousands into foreclosure.

Business groups have no interest in reopening the 2005 bankruptcy bill, one of the first major achievements of Bush's second term, which passed when Republicans controlled Congress. But Dodd calls it "one of the worst pieces of legislation ever passed."

More than 801,000 personal bankruptcy filings were made last year, compared with more than 573,000 in 2006, according to statistics collected by the National Bankruptcy Research Center and released by the American Bankruptcy Institute (ABI) on Thursday.

"The roughly 40 percent spike in consumer bankruptcies during 2007 presages even higher filings this year, as the heavy consumer debt load is made worse by the home mortgage crisis," said ABI Executive Director Samuel Gerdano.

Final state-by-state bankruptcy statistics for 2007 have yet to be released, but the picture is similarly bleak based on data from January through September. In California, for example, bankruptcies during the first three quarters of 2007 increased by 87 percent — from 27,230 to 50,869 — when compared with the same time in 2006.

Sen. Richard Durbin, D-Ill., said that an estimated 2.2 million homes might be lost to foreclosure in the coming months and that up to a third of all homeowners are likely to see a decline in their home values.

The Senate is considering a bill that would expand the authority of bankruptcy judges to reduce the size of home loans. Under a bill introduced by Durbin, judges could modify mortgages by treating them as secured debt only up to the market value of the property.

An estimated 575,000 Americans could benefit from such a change, according to Mark Zandi, chief economist and co-founder of Moody's Economy.com Inc., a company that does economic research and consulting.

"There is now a broad consensus that the national house prices will fall by between 10 and 15 percent in their peak to their eventual trough," Zandi said. And if the mortgage crisis causes a recession, he said, it will lead to further declines in house prices.